1. Field of the Invention
This invention is directed toward a method of financial guarantees, wherein a first entity, hereafter referred to as the Secondary Guarantor, engages in the business of providing and evaluating financial guarantees by way of a joint venture or other arrangement with a second entity, hereafter referred to as the Primary Guarantor, authorized by the appropriate authorities to engage in the writing of financial guarantees. These entities combine to form the "Guarantor". The guarantee is preferably sold by the Secondary Guarantor to an owner of a product or commodity, and guarantees that the owner will obtain a remuneration subsidy or "settlement" for the product or commodity at the time of sale, should the sale price be below the cost to produce the product or commodity. The invention is more particularly directed to guaranteeing the owner of cattle an established remuneration subsidy at the time of the sale of the cattle at a price below the cost to produce the marketed cattle.
2. Background of the Invention
The sale of any product or commodity by the owner of the product or commodity results in financial risk as well as potential financial rewards. The risks, and the potential rewards, are both usually enhanced if the selling owner is also the producer of the product or commodity being sold. The seller is often willing to sacrifice some of the reward, namely potential profit, for a reduction in financial risk, namely reduction in the likelihood of financial loss.
Attention will first be directed toward a brief discussion of the financial principles in the production and sale of a commodity such as beef cattle, although the general principles are also applicable to the production and sale of other items, such as articles of manufacture and the like.
The owner of cattle, hereafter referred to as a "feeder", often employs the service of a feedyard to fatten cattle prior to sale. Presently, approximately 22 million head of cattle are fattened in feedyards in the United States, and 5 to 6 million head are fattened in the state of Texas. Cattle usually enter the feedyard at a weight of approximately 600 to 800 pounds per head. After a perhaps 150 day period of feeding, the weight of each head of cattle increases to a weight in the range of 1,100 to 1,300 pounds, at which time the cattle are sold. The selling weight is usually referred to as the "weighed up fat FOB feed yard" weight, but will be simply referred to as the "sell" weight for brevity in this disclosure.
Extensive data concerning the fattening of cattle in feedyards was compiled from 1975 through 1995. This data indicates that, over the past 21 years, if a loss is incurred at the sale of the cattle, then the loss is statistically 15% or less of the cost to purchase and fatten the cattle to the time of sale. Stated another way, the sell price of cattle is rarely less than 85% of the "break even" selling price projected at the beginning of the fattening period. This price variation can be due to variation in demand at the time of selling, as well as other factors such as changes in the cost of feed during fattening, and the cost of processing and shipping at the time of sale. It should be noted that the time period over which past data was studied is sufficiently long to encompass expected periodic variations in cost to produce and sale price. Conclusions drawn from the analysis of this data set is, therefore, statistically significant. Obviously, the rancher strives to make a profit on the sale of a group or "pen" of fattened cattle. Statistically, however, the feeder can lose as much as 15% of the funds invested in the purchase and fattening of the cattle. Losses greater than 15% of the forecasted break even price are possible, but rare.
In many instances, the feeder is willing, at the time the pen of cattle enters the feedyard for fattening, to forfeit some potential profit in order to guarantee against a reasonable limit of potential loss. As an example, a feeder might be willing to forfeit one third of the potential profit on a pen of cattle, for a guarantee of subsidy of any loss up to 15% of the break even sell price. Using the previously mentioned "actuarial" break even pricing data from 1975 through 1995, such an arrangement would, at least statistically, greatly reduce the feeder's risk to any loss, but at the cost of reducing the maximum potential profit.
An objective of the present invention is to provide a method to reduce the risk of financial loss of a seller of a commodity or product by means of a guaranteed subsidy or settlement which is purchased by the seller at a specified time interval prior to the sale of the commodity or product, and is paid to the seller by the guarantor in the event that the product or commodity is sold below a break even cost. In the case of cattle, the guarantee is typically sold to the feeder within five days of the time at which the cattle are placed in the feedyard.
An additional objective of the invention is to provide a method of escrowing subsidy funds through a Primary Guarantor and a Secondary Guarantor, for payment to the seller in the event of a financial loss at the time of sale of the product or commodity.
A further object of the invention is to providing a method for determining the amount of fees, paid by the seller to the guarantor, in return for the guaranteed subsidy payable by the guarantor in the event of a financial loss to the seller at the time of sale.
A still further objective of the invention is to provide a method for transferring fee income paid by the seller and securities provided by the Secondary Guarantor to cover potential settlements which might exceed fee income, into an escrow account, which is preferably held by the Primary Guarantor which is a financial institution such as a bank. The method also includes procedures for transferring subsidy funds paid by to the seller to a second financial institution, whereby the seller can draw a subsidy or settlement in the event the product or commodity is sold at a financial loss.
A further objective of the invention is to provide a method for the seller to file a claim, through the Secondary Guarantor, in the event of a financial loss, whereby the Secondary Guarantor then makes the payment of a subsidy settlement to the client through the second financial institution.
An even further objective of the invention is to provide a method for subsidizing a cattle feeder against a loss incurred at the time of the sale of a pen of cattle, where the amount of the subsidy is based upon a percentage of an actuarially determined break even sale price for the pen of cattle.
There are additional objectives of the invention which will become apparent in the following disclosure.